Chapter 4, Problem 4.6BP

(a)

To determine

Adjusting entries:

Adjusting entries refers to the entries that are made at the end of an accounting period in accordance with revenue recognition principle, and expenses recognition principle.  The purpose of adjusting entries is to adjust the revenue, and the expenses during the period in which they actually occurs.

Rules of Debit and Credit:

Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

• Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
• Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease

Income statement:

This is the financial statement of a company which shows all the revenues earned and expenses incurred by the company over a period of time.

Generally Accepted Accounting Principle (GAAP):

Two generally accepted accounting principles that relates to adjusting the accounts are as follows:

• The revenue recognition principle
• The expenses recognition principle

The revenue recognition principle:

The revenue recognition principle refers to the revenue that should be recognized in the time period, when the performance obligation (sales or services) of the company is completed.

The expense recognition principle:

The expense recognition principle refers to the expenses that should match with revenue (matching principle) in the period when the company incurred expenses in order to generate the revenue.

To prepare:  The adjusting journal entries in the book of TP Test at April 30, 2014.

(b)

To determine

To prepare: The correct income statement of TP Test.

(c)

To determine

To explain: The effects of GAAP principle which was not recognized at the time of preparing the income statement.